While often used interchangeably, state tax and inheritance tax represent two distinct types of death taxes. An estate tax is a death tax levied on the estate whereas an inheritance tax is imposed on the heir who receives the estate.
Estate tax is levied according to the net value of the property owned by the deceased at the time of death. Estate tax is paid before the estate is transferred to the surviving heir. Either the government or state can impose estate taxes, although few states do so.
The state has sole jurisdiction in imposing an inheritance tax, and inheritance tax is enforced in only six states: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. A surviving heir does not have to live in one of these six states to pay an inheritance tax. If an heir lives in Washington State and inherits property from an uncle who owned property in New Jersey, the heir may have to pay New Jersey inheritance tax.
Whether you owe an inheritance tax depends on the nature of the your relationship to the deceased. If you were the deceased’s spouse, registered domestic partner or civil union partner, you will be exempt from paying the inheritance tax and will pay only 1 percent of the property’s market value over time. But if you are inheriting as a distant third cousin or friend of the deceased, then you will have to pay the tax and a higher percentage of the property’s market value over time.